Mideast Oil Boom May Not Fuel Reforms

April 18, 2005 11:30 GMT

By Robert McMahon

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Mideast Oil Boom May Not Fuel Reforms

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Iraq's oil isn't a cure-all, but has helped fund essential areas
Washington, 18 April 2005 (RFE/RL) -- A new World Bank report says surging oil revenues have created an economic boom for much of the Middle East, but adds that states in the region still lag behind on economic reforms and governance.

The World Bank's report says states ranging from Morocco to Iran must diversify their economies and reduce the role of government in economic activity.

The report -- released yesterday during the World Bank/IMF spring meetings -- says that during the last two years economic growth in the Middle East and North Africa averaged more than 5.6 percent per year. That marks the strongest growth in a decade.

Some states have reduced trade barriers and unemployment during the oil boom. But the bank says overall progress on improving the business climate has been the weakest in the world.

The bank's chief economist for the region, Mustapha Nabli, told reporters that the oil-rich Mideast states continue to fall far behind the rest of the world in important governance issues like public accountability.

"There has not been much progress in terms of governance and this is extremely important because this is critical for the progress of reforms, in general, structural reforms," Nabli said. "And when we look at this slow progress of structural reforms in general, this is not very good for the long term prospects."

Bank economists point to the region's high population growth and say an expansion of non-oil sectors is crucial to provide an estimated 100 million jobs needed in the region over the next 20 years.

The World Bank says that international experience with structural reforms suggests that they have been successful in countries with "strong coalitions for change." But Nabli said these coalitions -- such as civil society -- have been weakened by the growth of state budget revenues from oil.

"We argue are that the oil revenue is what I call a soft-budget constraint which is not very helpful in terms of pushing for reform and letting constituencies for reform operate," Nabli said.

The report ranks Iran near the bottom in key governance areas.

The World Bank report cites Iran as an example of this diminishing enthusiasm for reform. It said Iran had shown some initial progress with reforms in the trade and financial sectors. But during the last two years, the report says, progress has slowed significantly.

It says the economy has yet to address reforms needed to improve the business environment such as privatizing public enterprises. The report ranks Iran near the bottom in key governance areas.

One of the report's authors, Jennifer Keller, told RFE/RL the region's poor record in public accountability deprives countries of the internal debate needed to drive successful reforms.

"People do need certain rights, [a] certain ability to mobilize to process information, to be able to form coalitions for change," Keller said. "So this is why I think we would say that the governance agenda is critical to moving forward to second generation reforms."

The World Bank report includes a section on Iraq's challenges in the post-Saddam era. It says the country faces high unemployment, widespread poverty, and weak social protection systems, further aggravated by the volatile security situation.

But World Bank officials told reporters that unexpectedly high oil revenues had allowed Iraq to fund some essential areas.

The World Bank's Iraq country director, Joseph Saba, told RFE/RL that oil revenues have been used to maintain salaries for state employees and help restore the civil service. That has freed some donors to concentrate on capital investments on infrastructure and trade.

But the oil sector itself needs major investment, Saba said.

"It's obviously clear that Iraq's oil sector needs a great deal of refurbishment, the fields need to be reworked, a great deal of investment has to be done for Iraq to meet its potential not only in oil but also in gas," Saba said.

The World Bank report focused on economic developments, but it complements in some ways the series of UN-sponsored Arab Human Development reports of the last three years. Those reports criticized the prevalence of authoritarianism in the Middle East region.

The latest Arab Development report called for freely elected legislatures, an end to discrimination, and independent judiciaries. Otherwise, it said, Arab governments would face internal conflict or reforms imposed by outside powers.